Business Overview

MasterBrand Inc (MBC) is the largest manufacturer of residential cabinets in North America, offering a comprehensive portfolio of leading stock, semi-custom, and premium cabinetry products for the kitchen, bathroom, and other areas of the home. The company's superior product quality, innovative design, and service excellence have driven a compelling value proposition that has allowed it to maintain a dominant market position.

MasterBrand was founded over 70 years ago in 1954 under the name United Cabinet Incorporated. The company has grown to become the industry leader through strategic acquisitions and organic growth initiatives. In July 2024, MasterBrand acquired Dura Investment Holdings LLC, the parent company of Supreme Cabinetry Brands, Inc., for $527.3 million. This transaction broadened MasterBrand's portfolio of premium cabinetry products, further diversified its channel distribution, and added to its strategically located manufacturing footprint.

Prior to becoming an independent company, MasterBrand was operated as the Cabinets segment of Fortune Brands. On April 28, 2022, Fortune Brands announced the separation of the Cabinets segment into a standalone publicly-traded company. This separation was completed on December 14, 2022, with MasterBrand, Inc. becoming an independent, publicly-traded company listed on the New York Stock Exchange under the symbol MBC.

The transition to a standalone public company brought new challenges and responsibilities for MasterBrand. After the separation, the company incurred certain costs as a standalone public company, including services provided by its own resources or through third-party service providers. This shift required MasterBrand to adapt its operations and corporate structure to function independently.

Throughout its history, MasterBrand has faced various challenges, including navigating changes in the housing market, dealing with market competition, and managing its global supply chain. Despite these obstacles, the company has consistently demonstrated its ability to adapt to market conditions, leverage its scale and operational expertise, and pursue strategic initiatives to drive growth and maintain its leadership position in the residential cabinet industry.

MasterBrand's products are sold throughout the United States and Canada to the remodeling and new construction markets through three primary channels: dealers, retailers, and builders. The company has built the industry's largest and strongest network of over 7,700 cabinet dealers across North America, providing exceptional market reach and the ability to target key growth markets. MasterBrand also serves a variety of top continental retailers, including its two largest customers, Lowe's and The Home Depot, and has strategically partnered with regional and large-scale builders for single-family construction.

Product Portfolio

MasterBrand's operations are organized into a single reportable segment based on the nature of its products, production and distribution methods, internal management structure, and information regularly reviewed by the chief operating decision maker. The company's product portfolio is divided into three main categories:

Stock Products: These offer consumers a strong value proposition at entry-level pricing. Stock products benefit from low design complexity, standardized components, and shorter lead times, while still providing exceptional quality and reliability.

Semi-Custom Products: This line provides more styles and features than stock cabinets, allowing consumers to create a more personalized space at a lower price point compared to premium products.

Premium Products: MasterBrand's premium product line enables consumers to achieve their dream home by designing highly customized cabinets to meet their exact specifications. These products offer the highest level of personalization and features.

Financial Performance

In fiscal year 2024, MasterBrand reported net sales of $2.7 billion, a 1% decrease compared to the prior year. This top-line performance was driven by a combination of a 4% contribution from the Supreme acquisition, offset by a slight decline in the company's legacy business due to softer end-market demand, particularly in the repair and remodel segment. The decline was primarily driven by the combined net impact of price and mix on the company's overall average selling price, which accounted for 77% of the decrease, while lower sales unit volume represented 23% of the decrease.

Gross profit margin decreased 60 basis points to 32.5%, impacted by lower net average selling prices, slight volume declines, and the effect of certain discrete items. Cost of products sold decreased by 0.1% to $1.82 billion in 2024, representing 67.5% of net sales, compared to 66.9% in the prior year.

Selling, general, and administrative expenses increased by 5.9% to $603.1 million in 2024, or 22.3% of net sales, compared to 20.9% in the prior year. The increase was primarily due to $25.4 million in increased acquisition-related costs associated with the acquisition of Supreme, the inclusion of Supreme's results ($24.4 million), and higher associate-related costs, net of lower variable compensation ($9.1 million). These increases were partially offset by lower distribution and commission costs ($21.4 million) resulting from the decrease in sales unit volume.

Net income for fiscal 2024 was $125.9 million, down 31% from the prior year, while diluted earnings per share decreased from $1.40 to $0.96. The decline in profitability was primarily due to lower gross margins, higher selling, general, and administrative expenses (which included acquisition-related and restructuring costs), and increased interest expense related to the funding of the Supreme acquisition.

For the fourth quarter of 2024, MasterBrand reported revenue of $667.7 million and net income of $14.0 million. Year-over-year, Q4 2024 net sales decreased 1% due to increased choppiness in the repair and remodel business, resulting in a 6% volume decline in the legacy business. This, along with softer end market demand, impacted the company's ability to realize previously implemented price increases. The Supreme acquisition contributed a 9% year-over-year increase to net sales in Q4 2024.

Geographic Performance

MasterBrand sells its products primarily in the United States and Canada. Net sales to international markets represented approximately 5% of total net sales in fiscal 2024.

Liquidity

Despite the softer market conditions, MasterBrand continued to demonstrate its operational excellence, generating $211.1 million in free cash flow for the year, representing a conversion rate in excess of net income. This strong cash flow performance allowed the company to maintain its balance sheet flexibility, ending the year with $120.6 million in cash and $405.4 million of available liquidity on its revolving credit facility.

As of December 29, 2024, MasterBrand's debt-to-equity ratio stood at 0.84, with a current ratio of 1.65 and a quick ratio of 0.95. The company has a $750 million revolving credit facility, of which $430 million was drawn as of the end of the fiscal year.

Navigating Market Challenges

MasterBrand has faced a challenging macroeconomic environment, with the repair and remodel segment, which accounts for a significant portion of the company's business, experiencing softer demand, particularly in the latter part of 2024. This softness, coupled with increased choppiness in the market, resulted in a 6% year-over-year volume decline in the legacy business during the fourth quarter. Additionally, the mix shift towards lower-priced products exacerbated existing average selling price headwinds, leading to a 4% year-over-year decline in net ASP for the legacy business.

To navigate these market challenges, MasterBrand has taken a multi-faceted approach. Operationally, the company continues to focus on increasing the flexibility and efficiency of its manufacturing footprint, announcing the consolidation of three facilities in North Carolina and the relocation of its Colton, California facility to North Las Vegas, Nevada. These actions are designed to enable a more cost-effective network that can better serve customers while maintaining service and delivery capabilities.

Strategically, MasterBrand is leveraging its "Align to Grow" initiative to tailor product offerings to the specific needs of its customer channels and the regional end-markets best positioned for growth. The company is also continuing to invest in its "Tech Enabled" initiative, which aims to digitize the customer experience and provide actionable insights to drive demand, despite the near-term headwinds. Management believes these strategic investments will position MasterBrand for outsized future growth when market conditions improve.

Outlook and Guidance

For fiscal year 2025, MasterBrand expects its overall market demand to be down low single-digits year-over-year, with performance varying by end-market. However, the company anticipates its annual net sales will be up mid-single-digits, driven by a mid-single-digit contribution from the Supreme acquisition, as well as modest share gains in its legacy business through new product introductions and channel-specific offerings.

To mitigate the impact of the softer market conditions, MasterBrand plans to continue optimizing its manufacturing footprint and leveraging its highly variable cost structure. The company also expects to realize additional cost savings through its continuous improvement initiatives, which, combined with the planned investments in its strategic initiatives, is expected to result in adjusted EBITDA in the range of $380 million to $410 million, with adjusted EBITDA margins of approximately 13.5% to 14.3% for fiscal 2025.

Additionally, MasterBrand provided the following guidance for fiscal 2025:

• Adjusted diluted earnings per share are expected to be in the range of $1.40 to $1.57.

• Planned capital expenditures of $85 million to $95 million, with $27 million related to Supreme integration and footprint realignment.
• The company expects to maintain free cash flow in excess of net income, though it anticipates being a net user of cash in Q1 2025 due to interest payments, incentive and tax payments, and integration costs.

Industry Trends

The global furniture market, which includes the residential cabinet segment, is expected to experience significant growth in the coming years. Industry projections indicate that the market is set to grow at a compound annual growth rate (CAGR) of 5.25% from 2025 to 2030, potentially reaching approximately $867 billion by 2030. The North American region, where MasterBrand primarily operates, remains the largest furniture market globally. However, the Asia Pacific region is emerging as the fastest-growing market, presenting potential opportunities for future expansion.

Conclusion

MasterBrand's dominant market position, diversified product portfolio, and strategic initiatives have positioned the company to navigate the current market challenges. While the near-term macroeconomic environment remains uncertain, MasterBrand's focus on operational excellence, product innovation, and strategic investments in technology-enabled solutions should allow it to capitalize on the industry's long-term growth potential and deliver value for its shareholders. The company's strong cash flow generation, balanced capital allocation strategy, and ongoing efforts to optimize its manufacturing footprint demonstrate its commitment to maintaining financial flexibility and driving operational efficiency in the face of market headwinds.